P.O. BOX 2067 CHARLESTON, WV 25327
PHONE: (304) 558-0500 FAX: (304) 558-3321
Joe Manchin III Governor
John C. Musgrave Director
MEMORANDUM
TO: Joint Committee on Government and Finance
FROM:
RE:
John C. Musgrave,
Direcror't:!J- .. W .~
Monthly Report on Lottery Operations Month Ending July 31, 2008 August 20, 2008
DATE:
This report ofthe Lottery operations is provided pursuant to the State Lo~ry Act. Financial statements of the Lottery for the month ending July 31, 2008 are attached. Lottery revenue, which includes on-line, instant, video lottery sales and table games, was $131,859,607 for the month of July. Transfers of lottery revenue totaling $50,346,976 made for the month of July to the designated state agencies per Senate Bill 150, Veterans Instant Ticket Fund, Racetrack Video Lottery Act (§29·22A-I0), and the Racetrack Table Games Act(§29-22C-27). The amount transferred to each agency is shown in Note 9 on pages IS and 16 of the attached financial statements. The number of traditional and limited retailers active as ofJuly 31, 2008 was 1,608 and 1,619 respectively. A listing of the names and amounts of prize winners has been provided to the Clerk of the Senate, the Clerk of the House and Legislative Services.
If any member of the Committee has questions concerning the Lottery, please call me. Also if any members of the Legislature wish to visit the Lottery offices, I would be pleased to show them our facilities and discuss the Lottery with them.
JCMlrd Attachment pc: Honorable Joe Manchin ill Virgil T. Helton, Cabinet Secretary - Dept. ofRevenue John Perdue, Treasurer Glen B. Gainer ill, Auditor Members ofthe West Virginia Lottery Commission
www.wvlottery.com
WEST VIRGINIA LOTTERY
STATE OF WEST VIRGlNIA
FINANCIAL STATEMENTS ..UNAUDITED-
July 31, 2008
WEST VIRGINIA LOTTERY
TABLE OF CONTENTS
Page
BAL.AN"CE SHEETS .••.••••••....•.••..•••.•••••. 3
STATEMENTS OF REVENUES, EXPENSES AND CHANGES IN FUND NET ASSETS
4
STATEl\fENTS OF CASH .FLOWS ••••.••••••••••••
41
II • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • •
5
NOTES TO FmAN"CIAL STATEMENTS
,
*'
6 - 21
WEST VIRGINIA LOTTERY BALANCE SHEETS (In Thousands) -UnauditedJuly 31, 2008
June 30,
2008
ASSETS Current Assets: Cash and cash equivalents Accounts receivable Inventory Current portion ofinvestments held in trust Other assets Total Current Assets Noncurrent Assets: Restricted cash and cash equivalents Investments held in trust, less CWTeJlt portion Capital assets Less accumulated depreciation and amortization Net Capital Ass~ts Total Noncurrent Assets Total Assets LIABILITIES AND NET ASSETS Current Liabilities: Accrued nonoperating distributions to the State ofWest Virginia Estimated prize claims Accounts payable Other accrued liabilities Current portion of deferred jackpot prize obligations Total Current Liabilities Deferred jackpot prize obligations, less current portion Total Liabilities Net Assets: Invested in capital assets Unrestricted assets (deficit) Unrestricted assets.. Committed ( see note 11) Restricted assets (see note 10) Total Net Assets Total Liabilities and Net Assets
$
$
200,829 25,157
$
530
10 2,575 229,101 58,574 126 17,598 (12,515) 5,083 63,783 292,884
$
180,463 36,846 300 10 2,595 220,214 58,487 126 17,598 (12,347) 5,251 63,864 284,078
$
171,676 12,938 1,338 42,231
$
129
228,312
166,967 12,967 2,693 36,837 129 219,593
228,312 5,083 (4,583) 5,498 58,574 64,572
219,593 5,251 (4,751) 5,498 58.,487 64,485 $ 284,078
292,884
The accompanying notes are an integral part ofthese financial statements.
3
WEST VmGINIA LOTTERY STATE'MENTS OF REVENUES, EXPENSES AND CHANGES IN FUND NET ASSETS FOR THE ONE MONTH PERIOD ENDED JULy 31, 2008 (In Thousands) -UnauditedCURRENT MONTH 2008 2007 YEAR TO DATE 2008 2007
Lottery revenues On-line games Instant games Racetrack video lottery Limited video lottery Table games Less commissions On-line games Instant games Racetrack video lottery Limited video lottery Table games Less on-line prizes Less instant prizes Less ticket costs Less vendor fees and costs Gross profit Administrative expenses Advertising and promotions Wages and related benefits Telecommunications Contractual and professional Rental Depreciation and amortization Other administrative expenses Other Operating Income Operating Income Nonoperating income (expense) Investment income Nonoperating income - OPEB Interest expense Distributions to municipalities and counties Distributions to racetracks-capital reinvestment Distributions to the State ofWest Virginia Net income Net assets, beginning ofperiod Net assets, end ofperiod
S
6,383 9,468 78,715 34,574 2,720 131,860 447 663 44,584 16,941 1,070 63,705 3,206 6,545
$
6,344 10.164 83,394 32,398 132,300 444 711 47,235 15.875 64,265 2,996 6,982 155 335 10,468 57,567 707 520 121 97 54 48 140 1,687 88 55,968 918 (2) (635) (56,160) (55,879) 89 43,957 44,046
S
6,383 9,468 78,715 34,574 2,720 131,860 447 663 44,584 16,941 1,070 63,705 3,206 6,545
$
6,344 10,164 83,394 32,398 132,300 444 711 47,235 15,875 64,265 2,996 6,982 155 335 10,468 57.567 707 520 121 97
lOS
457 10,313 57,842 976 710 198 411 58 167 115 2,635 172 55,379
lOS
457 10,313 57,842 976 710 198 411 58· 167 115 2,635 172 55,379 442 (1) (677) (55,056) (55,291) 87 64,485 64,572
54
48 140 1,687 88 55,968 918 (2) (635) (56,160) (55,879) 89 43,957 44t 046
442
(1) (677)
(55,056) (55,291) 87 64,485 64,571
$
5:
S
$
The accompanying notes are an integral part ofthese financial statements.
4
WEST VIRGINIA LOTTERY NOTES TO FINANCIAL STATEMENTS -UnauditedNOTE 1 - LEGISLATIVE ENACTMENT The West Virginia Lottery (Lottery) was established by the State Lottery Act (Act) passed April 13, 1985, which created a special fund in the State Treasury designated as the "State Lottery Fund." The purpose of the Act was to establish and implement a state-operated lottery under the supervision of a state lottery commission (Commission) and a director. The Commission, consisting of seven members and the Director are appointed by the Governor. Under the Act, the Commission has certain powers and the duty to establish mles for conducting games, to select the type and number of gaming systems or games and to enter into contracts and agreements, and to do all acts necessary or incidental to' the performance of its duties and exercise of its power and duty to operate the Lottery in a highly efficient manner. The Act provides that a minimum. annual average of 45% of the gross amount received from each lottery shall be allocated for prizes and also provides for certain limitations on expenses necessary for operation and administration of the Lottery. To the extent available, remaining net profits are to be distributed to the State of West Virginia. As the State is able to impose its will over the Lottery, the Lottery is considered a component unit of the State and its financial statements are presented in the comprehensive annual financial report of the State as a blended proprietary fund component unit.
NOTE 2 .. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A summary ofthe significant accounting policies ofthe Lottery is presented below.
BASIS OF PRESENTATION - The West Virginia, Lottery is a component unit of the State of West Virginia, and is accoWlted for as a proprietary fund special purpose government engaged in business type activities. In accordance with Governmental Accounting Standards Board (GASB) Statement No. 34, "Basic Financial Statements and Management's Discussion and Analysis for State and Local Governments," and with accounting principles generally accepted in the United States of America, the financial statements are prepared on the accrual basis of accounting which requires recognition of revenue when eamed and expenses when incurred. As pennitted by Governmental Accounting Standards Board (GASB) Statement No. 20, "Accounting and Financial Reporting jOr Proprietary Funds and Other Governmental Entities That Use Proprietary Fund Accounting," the Lottery has elected not to adopt Financial Accounting Standards Board (FASB) statements and interpretations issued after November 30, 1989 unless the GASH specifically adopts such FASB statements or interpretations.
The Lottery is included in the State's basic fmancial statements as a proprietary fund and business type activity using the accrual basic of accounting. Because of the Lottery's presentation in these fmancial statements as a special purpose government engaged in business type activities, there may be differences in presentation of amounts reported in these fmancial statements and the basic financial statements of the State as a result of m~or fund determination.
USE OF ESTIMATES - The preparation of the financial statements in confonnity with accounting principles generally accepted in the United States of America requires management to make certain estimates and develop assumptions that affect the amounts reported in the financial statements and related notes to financial statements. Actual results could differ from management's estimates.
6
WEST VIRGINIA LOTTERY NOTES TO FINANCIAL STATEMENTS -Unaudited-
NOTE 2 . . SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
LOTTERY GAME OPERATIONS - The West Virginia Lottery derives its revenues from four basic types
of lottery games: instant, on-line, video type games, and table games. The Lottery develops multiple game themes and prize structures to comply with its enabling legislation, including aggregate annual minimum prize provisions. All bonded retailers and agents comprised principally of grocery and convenience stores serve as the primary distribution channel for instant and on-line lottery sales to the general public. The Lottery has contracted with a private vendor to manufacture, distribute, and provide data processing support for instant and on-line games. Under the tenns of the agreements) the Lottery pays a percentage of gross revenues or gross profits for the processing and manufacture ofthe games. Revenue from instant games is recognized when game tickets are sold to the retailers, and the related prize expense is recorded based on the specific game prize structure. Instant ticket sales and related prizes do not include the value of free plays issued for the purpose of increasing the odds of winning a prize. Sales of on-line lottery tickets are made' by licensed agents to the public with the use of computerized terminals. On-line games include POWERBALL®, a multi-state "jackpot" game; HOT LOTTO®, a multi-state "lotto" game; Cash25 "lotto" game; Daily 3 and 4 "numbers" games; and Travel, a daily "keno" game. Revenue is recognized when the agent sells the tickets to the public. Prize expense is recognized on the basis of actual drawing results. Commissions are paid to instant game retailers and on-line agents at the rate of seven percent of gross sales. A portion of the commission not to exceed one and one quarter percent of gross sales may be paid from unclaimed prize moneys. The amount paid from unclaimed prize moneys is credited against prize costs. In addition, retailers and agents are paid limited bonus incentives that include prize shares on winning tickets they sold and a ticket cashing bonus on winning tickets they cash. On a weekly basis, retailers and agents must remit amounts due to the Lottery. Retailers may not be able to order additional instimt tickets if payment has not been made for the previous billing period, while an agent's on-line terminal may be rendered inactive if payment is not received each week. No one retailer or agent accounts for a significant amount of the Lottery's sales or accounts receivable. Historically credit losses have been nominal and no allowance for doubtful accounts receivable is considered necessary. Racetrack video lottery is a self-activated video version of lottery games. The board-operated games allow a player to place bets for the chance to be awarded credits which can either be redeemed for cash or be replayed as additional bets. The coin operated games allow a player to use coins, currency, or tokens to place bets for the chance to receive coin or token awards which may be redeemed. for cash or used for replay in the coin operated games. The racetrack video lottery ,games' prize structures are designed to award prizes, or credits, at a stipulated rate of total bets played, and prize expense is netted against total video credits played. The Lottery recognizes as racetrack video lottery revenue "gross terminal income" equivalent to all wagers, net of related prizes. Amounts required by statute to be paid to the private and local government entities are reported as commissions. Racetrack video lottery legislation has established specific requirements for racetrack video lottery and imposed certain restrictions limiting the licensing for operation of racetrack video lottery games to horse and dog
7
WEST VIRGINIA LOTTERY
NOTES TO FINANCIAL STATEMENTS
..Unaudited.. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) racetracks in West Virginia, subject to local county elections pennitting the same. The legislation further stipulates the distribution of revenues from racetrack video lottery games, and requires any licensed racetrack to be responsible for acquiring the necessary equipment and bearing the risk associated with the costs of operating and marketing the games. Limited video lottery is also a self-activated video version of lottery games, which were first placed in operation in December 2001, located in limited licensed retailer areas restricted for adult amusement. The games allow a player to use cwrency to place bets for the chance to receive free games or vouchers which may be redeemed for cash. The limited video lottery games' prize structures are designed to award prizes, at a stipulated rate of total bets played, and prize expense is netted against total video credits played. The Lottery recognizes as limited video lottery revenue "gross terminal income" equivalent to all wagers, net of related prizes. Amounts required by statute to be paid to private entities are reported as commissions. Limited video lottery permit holders are statutorily responsible for acquiring equipment and bearing the risk associated with the costs of operating the games. Table games are lotteries as each gam~ involves consideration~ the possibility of a prize, and their outcome is determined predominantly by chance, which the common law of West Virginia has long held are the three essential elements of a lottery. Table games are the exclusive intangible intellectual property of the state of West Virginia. Table games legislation has established specific requirements for table games and imposed certain restrictions limiting the licensing for operation of table games to horse and dog racetracks in West Virginia, subject to local county elections permitting the same. Each racetrack licensed as an agent of the Lottery Commission to operate West Virginia table games shall have written rUles of play for each table game it operates which must be approved by the Commission. AIl wagers and pay-offs of winning wagers shall be made according to those rules of play. For the privilege of holding a table games license, there is levied a privilege tax of thirty-five percent of each licensee's adjusted gross receipts for the operation of West Virginia Lottery table games. Amounts required by statute to be paid to private and local government entities are reported as commissions. The legislation further stipulates the distribution of revenues from West Virginia table games, and requires any licensed racetrack to be responsible for acquiring the necessary equipment and bearing the risk associated with the costs of operating and marketing the games.
CASH AND CASH EQUIVALENTS - Cash and cash equivalents primarily consist of interest*eaming deposits with the West Virginia Board of Treasury Investments (BTl) and are recorded at fair value.
INVENTORY ~ Inventory consists of instant game tickets available for sale to approved Lottery retailers
and are carried at cost.
OTHER ASSETS - Other assets consist primarily of deposits restricted for payment of certain Multi-State Lottery Association activities.
CAPITAL ASSETS - The Lottery leases, under a cancelable operating lease, its office and warehouse
facilities. The Lottery also leases various office equipment under agreements considered to be
8
WEST VIRGINIA LOTTERY NOTESTOmNANCIALSTATEMENTS -UnauditedNOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) cancelable operating leases. Rental expense for the one month ended July 31, 2008 and July 31, 2007 approximated $58,017 and $54,010 respectively. The Lottery has adopted a policy of capitalizing assets with individual amounts exceeding $25,000. These assets include leasehold improvements, contributed and purchased equipment, comprised principally of technology property, office furnishings and equipment necessary to administer lottery games, are carried at cost. Depreciation is computed by the straight-line method using three to ten year lives.
COMPENSATED ABSENCES - The Lottery has accrued $371,165 and $298,548 of vacation and $0 and $467,954 of sick leave at June 30, 2008 and 2007, respectively, for estimated obligations that may arise
in connection with compensated absences for vacation and sick leave at the current rate of employee pay. Employees fully vest in all eamed but unused vacation. In accordance with State personnel policies, employees hired prior to July 1, 2001, vest in unused sick leave only upon retirement, at which time such unused leave can be converted into employer paid premiums for postretirement health care coverage or additional periods of credited service for purposes of determining retirement benefits. For employees hired prior to July 1, 1988, the Lottery pays 100% of the postretirement health care premium.. The Lottery pays 50% of the premium for employees hired after June 30, 1988 through July 1, 2001. The estimated obligation for sick leave is based on historical retirement rates and current health care premiums applicable to employee hire dates. Employees hired after June 30, 2001 do not vest in unused sick leave upon retirement. As of June 30, 2008 sick leave obligations are included in the OPEB(Other Postemployment Benefits) liability in Note 15.
NET ASSETS - Net assets are presented as restrictedt unrestricted and invested in capital assets which represents the net book value of all property and equipment ofthe Lottery.
Operating revenues and expenses for proprietary funds such as the Lottery are revenues and expenses that result from providing services and producing and delivering goods and/or services. Operating revenues for the Lottery are derived from providing various types of lottery games. Operating expenses include commissions, prize costs, other direct costs of providing lottery games, and administrative expenses. All revenues and expenses not meeting this defInition are reported as nonoperating revenues and expenses.
OPERATING REVENUES AND EXPENSES -
NOTE 3 - CASH AND CASH EQUIVALENTS, At July 31, 2008 the carrying amounts of deposits (overdraft) with financial institutions were ($8) thousand with a bank balance of $35 thousand. Of this balance $100 thousand was covered by federal depository insurance with the remaining balance collateralized with securities held by the State of West Virginia's agent in the State's name. A summary of the amount on deposit with the West Virginia Board of Treasury Investments (BTl) is as follows (in thousands):
9
WEST VIRGINIA LOTTERY NOTES TO FINANCIAL STATEMENTS
-UD8udited-
NOTE 3 - CASH AND CASH EQUIVALENTS (continued)
July 31, 20Q8
Amount on deposit with the BTl
~259t411
June 30, 2008 $239.002
The deposits with the BTl are part of the State ofWest Virginia's consolidated investment cash liquidity pool and are not separately identifiable as to specific types of securities. Investment income is pro-rated to the Lottery at rates specified by the BTl based on the balance ofthe deposits maintained in relation to the total deposits of all state agencies participating in the pool. Such funds are available to the Lottery with overnight notice. NOTE 4 - CAPITAL ASSETS
A summary ofcapital asset activity for the month ended July 31, 2008 is as follows (in thousands):
Capital Assets:
Historical Cost
At June 30? 2008
Additions
$
Deletions
$
$
Historical Cost At July 31, 2008
285
1,119 16,194 17,598
Constnwtion in $ Progress Improvements Equipment S
285 1,119 16,194 17,598
$
$
Accumulated
Depreciation: ffistorical Cost At June 30, 2008
Improvements Equipment
.$
Historical Cost
Additions
$
Deletions
$
$
At July 31, 2008
1,002
11,345 12,347
6
161 167
S
1~O08
$
$
S
11,506 12,514
NOTE 5 .. PARTICIPATION IN THE MULTI-STATE LOTIERY
The Lottery is a member of the Multi-State Lottery (MUSL), which operates the semi-weekly POWERBALL@ jackpot lotto game and HOT LOTTOe game, on behalfofparticipating state Iotteries~ Each MUSL member sells game tickets through its agents and makes weekly wire transfers to the MUSL in an amount equivalent to the total prize pool less the amount of prizes won in each state. Lesser prizes are paid directly to the winners by each member lottery. The prize pool for POWERBALLQI>, and HOT LOTTO@ is 500A» of each drawing period's sales, with minimum jackpot levels. Revenues derived from the Lottery's participation in the MUSL POWERBALLe jackpot game for the month and year-to-date periods ended July 31, 2008 were $3,678,869 and 53,678,869
10
WEST VIRGINIA LOTTERY NOTES TO FINANCIAL STATEMENTS
-UnauditedNOTE 5 - PARTICIPATION IN THE MULTI-STATE LOTTERY (continued) while related prize costs for the same periods were $1,855,004 and $1,855,004. Revenues derived from the Lottery's participation in the HOT LOTTO® game for the month and year-to-date periods ended July 31, 2008 were $316,343 and $316,343 while related prize costs for the same periods were $160,366 and $160,366. MUSL places 2% of each POWERBALL® drawing period's sales in separate prize reserve funds that serve as a contingency reserve to protect the respective MUSL Product Groups from unforeseen prize liabilities. Currently, the MUSL Board of Directors has placed a $75,000,000 limit on the POWERBALL® Prize Reserve Fund and a $25,000,000 limit on the Set Prize Reserve Fund. These funds can only be used at the discretion of the respective MUSL Product Group. Once the prize reserve funds exceed the designated limit, the excess becomes part of that particular prize pool. Prize reserve fund monies are refundable to MUSL Product Group members if the MUSL disbands or, after one year, if a member leaves the MUSL. At July 31, 2008 the POWERBALL® prize reserve fund had a balance of $98,912,954 of which the Lottery's share was $2,302,900. The Lottery has charged amounts placed into the prize reserve funds to prize costs as the related sales have occurred. NOTE 6 - RACETRACK VIDEO LOTTERY The Racetrack Video Lottery legislation stipulates the distribution of racetrack video lottery revenues. This legislation has been amended since inception to restate revenue distribution based on revenue benchmarks. Initially, four percent (4%) of gross tenninal revenue is allocated for lottery administrative costs. Sixty-six percent (66%) of net terminal revenue (gross less 4%) is allocated in lieu of commissions to: the racetracks (47%); other private entities associated with the racing industry (17%); and the local county and municipal governments (2%). The remaining revenues (34%) of net terminal revenue is allocated for distribution to State as specified in the Racetrack Video Lottery Act or subsequent State budget) as described in the Note 9 titled "Nonoperating Distributions to the State of West Virginia." The first benchmark occurs when the current year net tenninal revenue meets the fiscal year 1999 net terminal revenue. The COWlties and incorporated municipalities split 50/50 the two percent (2%) net terminal revenue. The second benchmark occurs when the cutTent year gross terminal revenue meets the fiscal year 2001 gross tenninal revenue. The four percent (4%) is no longer allocated for lottery administrative costs; instead the State receives this for distribution as specified by legislation or the State budget. The :final benchmark occurs when the current year net terminal revenue meets the fiscal year 2001 net terminal revenue. At this point a 10% surcharge is applied to net terminal revenue) with 58% of the surcharge allocated for distribution to the State as specified by legislation or the State budget, and 42% of the surcharge allocated to separate capital reinvestment funds for each licensed racetrack. After deduction ofthe surcharge, 55% ofnet tenninal revenue is allocated in lieu of commissions to: the racetracks (42%); other private entities associated with the racing industry (11%); and the local county and incorporated municipality governments (2%). The remaining net terminal revenue (45%) is
11
WEST VIRGINIA LOTTERY
NOTESTOmNANC~STATEMENTS
..UnauditedNOTE 6 - RACETRACK VIDEO LOTTERY (continued)
allocated for distribution to the State as specified in the Racetrack Video Lottery Act or subsequent State budget, as described in Note 9. Amounts from the capital reinvestment fund may be distributed to each racetrack if qualifying expenditures are made within the statutory timeframe; otherwise amounts accumulated in the fund revert to the state excess lottery revenue fund. The WV Lottery~ along with the Rhode Island and Delaware lotteries, participate in Multi..Jurisdictional Wide Area Progressive (MWAP) video games. This allows each of the lotteries to offer a higher progressive jackpot than they could generate alone. MUSL manages the progressive games and charges each participant a MWAP contribution fee of 4% of the amount wagered. A summary ofracetrack video lottery revenues for the month ended July 31,2008 and year..to-date follows (in thousands):
CUITent 2008 Total credits played Credits (prizes) won MWAP Contributions Gross terminal income Administrative costs Net Terminal Income Less distribution to agents Racetrack video lottery revenues
S 803,608 (724,515) (378) 78,715 (3,149) 75,566 (44,584) 53°2982
Month 2007
Year- to ..Date 2008
5803,608 (724,515) (378) 78,715 (3,149) 75,566 (44,584) $30,982
2007
$ 873,013 (789,278) (341) 83,394
(3,336) 80,058 (47,235)
$ 32,823
$ 873,013 (789,278)
(341)
83,394 (3,336) 80,058 (47,235)
$ 32,823
A summary of video lottery revenues paid or accmed for certain state funds to conform with the
legislation follows (in thousands):
July 31. 2008 State Lottery Fund State Excess Lottery Revenue Fund Capital Reinvestment Fund Tourism Promotion Fund 1.375% Development Office Promotion Fund .375 % Research Challenge Fund .5 % Capitol Renovation & Improvement Fund .6875 % Parking Garage Fund .0625 % Parking Garage Fund 1 % Cultural Facilities & Capitol Resources Fund .5 % Capitol Dome & Capitol Improvements Fund .5 % Worker's Compensation Debt Reduction Fund 7 % Total nonoperating distributions
522,670
Year-to Date
$22,670
1,039 283 378 519 47 500 128 128 5,290 $30,982
1,039 283 378 519 47 500
118
128 5,290 $30,982
12
WEST vm.GINIA LOTTERY NOTES TO FINANCIAL STATEMENTS -UnauditedNOTE 7 - LIMITED VIDEO LOTTERY Limited video lottery legislation passed in 2001 has established specific requirements imposing certain restrictions limiting the licensing for the operation of limited video lottery games to 9,000 tenninals placed in licensed retailers. These licensed retailers must hold a qualifying permit for the sale and consumption on premises of alcohol or non-intoxicating beer. The Lottery has been charged with the administration, monitoring and regulation of these machines. The legislation further stipulates the distribution of revenues from the limited video lottery games, and requires any licensees to comply with all related rules and regulations of the Lottery in order to continue its retailer status. The Limited Video Lottery legislation stipulates that 2% of gross terminal income be deposited into the state lottery fund for administrative costs. Then, the state share percentage of gross profit is to be transferred to the State Excess Lottery Revenue Fund. Such percentage is between 30 and 50 percent and is subject to change on a quarterly basis. Two percent is distributed to counties and incorporated municipalities in the manner pre~cribed by the statute. The remaining amount of gross profit is paid to retailers and/or operators as prescribed in the Act, and is recorded as limited video lottery commissions in the financial statements. Municipal and county distributions are accounted for as nonoperating expenses. A summary of l~ted video lottery revenues for the month ended July 31, 2008 and year-ta-date follows (in thousands): ,
Current
2008
Month 2007 $396,544 (364,146) $32,398
(648)
Year- to -Date
2008 $418,637 (384,063) $34,574 (692) $33,882 (16,941) (677) $16,264
2007 $396,544 (364,146) $32,398 (648) $31,750 (15,875) (635) $15,240
Total credits played Credits (prizes) won Gross terminal income Administrative costs Gross Profit Commissions Municipalities and Counties Limited video lottery revenues
$418,637 (384,063) 534,574 (692) 33,882 (16,941) , (677) $16,264
$31,750 (15,875) (635) $15,240
NOTE 8 - TABLE GAMES Table Games legislation passed in 2007 per House Bill 2718. Table games include blackjack, roulette, craps, and various types of poker. Each racetrack licensee is subject to a privilege tax of thirty five percent (35%) of adjusted gross receipts which will be deposited weekly into the Racetrack Table Games Fund. From the gross amounts deposited into the Racetrack Table Games Fund, the Commission, on a monthly basis shall: Retain 3% of the adjusted gross receipts for administrative expenses of which at least $100,000 and not more than $500,000 annually will be transferred to the Compulsive Gambling Treatment Fund. Transfer two and one-half percent of adjusted gross receipts from all thoroughbred racetracks with West Virginia
13
WEST VIRGINIA LOTTERY NOTES TO FINANCIAL STATEMENTS -UnauditedNOTE 8 - TABLE GAMES (continued)
Lottery table games to the special funds established by each thoroughbred racetrack table games licensee for the payment of regular racetrack pm-ses to be divided equally among each licensee and transfer two and one..halfpercent of adjusted gross receipts from all greyhound racetracks with West Virginia Lottery table games to the special funds established by each greyhound racetrack table games licensee for the payment of regular racetrack purses to be divided equally among each licensee. Transfer two percent of the adjusted gross receipts from all licensed racetracks to the Thoroughbred Development Fund and the Greyhound Breeding Development Fund to be divided pro rata among the development funds. Transfer one percent of the adjusted gross receipts from each licensed racetrack to the county commissions of the counties where racetracks with West Virginia Lottery table games are located to be divided pro rata among the counties. Transfer two percent of the adjusted gross receipts from each licensed racetrack to the governing bodies of municipalities within counties where racetracks with West Virginia Lottery table games are located as prescribed by statute. And transfer one-half of one percent of the adjusted gross receipts to the governing bodies of municipalities in which a racetrack table games licensee is located to be divided equally among the municipalities. The Commission will distribute the remaining amounts, hereinafter referred to as the net amounts in the Racetrack Table Games Funds as follows: 1) Transfer four percent into a special fund to be established by the Racing Commission to be used for payment into the pension plan for all employees of each licensed racing association; 2) Transfer ten percent, to be divided and paid in equal shares, to each county commission in the state where table games are not located; 3) Transfer ten percent, to be divided and paid in equal shares, to the governing bodies of each municipality in the state where table games are not located; and 4) Transfer seventy-six percent to the State Debt Reduction Fund. The cash transferred to the State Debt Reduction Fund in the current month is included in Note 9Nonoperating Distributions to the State of West Virginia. The table games adjusted gross receipts for the month and year-to-date periods ended July 31, 2008 were $7,772,867 and $7,772,867, respectively. The following table shows the month and year . .to.. date totals of the privilege tax and the accrued distributions (in thousands) to be transferred in the subsequent month: Table Games Privilege Tax Interest on Table Games Fund Administrative Costs Total Available for Distribution Less Distributions: Racetrack Purse Funds Thoroughbred & Greyhound Development Funds Racing Commission Pension Plan Municipalities/Counties Total Distributions State Debt Reduction Fund Month $ 2,720 3 (233) 2,490 194 ISS 75
YTD
$2,720 3
(233) 2,490 194 ISS 7S 646 1,070
646
1,070
$
1,420
$1,420
14
WEST VIRGINIA LOTIERY NOTES TO FINANCIAL STATEMENTS -UnauditedNOTE 9- NONOPERATING DISTRIBUTIONS TO THE STATE OF WEST VIRGINIA
The Lottery periodically distributes surplus funds~ exclusive of amounts incurred and derived from limited video lottery and a portion of racetrack video lottery funds, to the State of West Virginia in accordance with the legislation. For the year ending June 30, 2009 the State Legislature budgeted $168,151,542 of estimated profits ofthe-Lottery for distributions to designated special revenue accounts of the State of West Virginia. With regard to the State Lottery Fund, legislation stipulates that debt service payments be given a priority over all other transfers in instances where estimated profits are not sufficient to provide for payment of all appropriated distributions. Debt service payments of $1,800,000 and $1,000,000 per month for the first ten months of each fiscal year currently have such priority. Transfers made pursuant to the State Excess Lottery Revenue Fund have similar requirements; currently payments are $2,900~000 per month for the first ten months of each fiscal year, with $1,000,000 of this amount,beginning· September 2004. In addition, Legislation provides that, if in any month, there is a shortage of fimds in the State Excess Lottery Revenue Fund to make debt service payments, the necessary amount shall be transferred from the State Lottery Fund to cover such shortfall, after the State Lottery Fund debt service payments have been made. Repayments to the State Lottery Fund are required to be made in subsequent months as funds become available. During the month ended July 31, 2008 the Lottery made such distributions and accrued additional distributions of $45,323,456. The Lottery is a non-appropriated state agency and therefore does not have a budget adopted by the Legislature. Since the enactment of the Racetrack Video Lottery Act, the Lottery is also statutorily required to distribute income 'from racetrack video lottery operations as described in Note 6. As of July 31, 2008 the Lottery accmed additional distributions relating to racetrack video lottery operations of$2,881,101. Note 7 describes the Limited Video Lottery Act and the statutory distributions required to be made from limited video lottery operations. Note 8 describes the Table Games Act and the statutory distributions required to be made from table games operations. A summary of the cash distributions'made to certain state agencies to conform to the legislation follows (in thousands): BUDGETARY DISTRIBUTIONS State Lottery Fund: Bureau of Senior Services Department of Education Library Commission Higher Education-Policy Commission Tourism Natural Resources Division of Culture & History Department ofEducation & Arts Building Commission School Building Authority Total State Lottery Fund July 31, 2008
$ 16,188
Year-to-Date
$ 16,188
9,686 3,180 3,041 2,191 961 1,619 334 1,000 1.800 $ 40,000
9,686 3,180 3,041 2,191 961 1,619 334 1,000 1.800 $ 40,000
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WEST VIRGINIA LOTTERY NOTES TO FINANCIAL STATEMENTS -UnauditedNOTE 9- NONOPERATING DISTRIBUTIONS TO THE STATE OF WEST VIRGINIA .(continned)
State Excess Lottery Revenue Fund: Economic Development Fund Higher Education Improvement Fund General Purpose Account Higher Education Improvement Fund State Park Improvement Fund School Building Authority Refundable Credit Excess Lottery Surplus West Va. Infrastructure Council Total State Excess Lottery Revenue Fund
$
1,900 1,000
$
2,900
$
2,900
Total Budgetary distributions: Veterans Instant Ticket Fund Other Racetrack Video Lottery distributions: TQurism Promotion Fund 1.375% Development Office Promotion Fund .375% Research Challenge Fund .5% Capitol Renovation & Improvement Fund .6875% Parking Garage Fund .0625 % Parking Garage Fund 1 % Cultural Facilities & Cap. Resources Fund .5% Capitol Dome & Cap. Improvements Fund .5% Workers Compensation Debt Reduction Fund 7% Total Table Games State Debt Reduction Fund Total nonoperating distributions to the State of West Virginia (cash basis) Accrued nonoperating distributions, begimrlng Accrued nonoperating distributions, end Total nonoperating distributions to the State of West Virginia
$ $
42,900 153
$ 42,900
$
153
$
937 255 341 468 43 494 188 3,456 6,182 1,112 50,347 (166,967) 171,676
$
937 255 341 468 43 494 188 3,456 6,182 1,112
$
$
$
$
$ .50,347
(166,967) 171,676
$ 55,056
$ 55,056
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WEST VIRGINIA LOTTERY NOTES TO FINANCIAL STATEMENTS ..Unaudited.. NOTE 10 - RESTRICTED NET ASSETS
On June 14, 2006, House Bill 106 was enacted by the West Virginia State Legislature to set aside unexpended administrative expenses of the Lottery up to the limits for such expenses established by the enabling legislation of traditional, racetrack video lottery, and limited video lottery games in an amount not to exceed $20,000,000 beginning in fiscal year 2006 and each year through fiscal year 2012. These assets are to be set aside for the design and construction of a building for the use of the Lottery and certain other State of West Virginia governmental entities. The lottery contributed $16,305,938 to the fund for fiscal year 2008 plus related interest of $1,354,095.
NOTEI1-CO~TMENTS
The Lottery Commission has set aside funds as unrestricted net assets for the acquisition of future assets. As of Jooe 30,2008, a balance of $5,497,770 is available for this purpose.
NOTE 12 - DEFERRED JACKPOT OBLIGATIONS AND INVESTMENTS HELD IN TRUST
Prior to becoming a member of the Multi-State Lottery in 1988, the prize structure of certain games operated solely by the Lottery included jackpot prizes. The Lottery, at its discretion, could choose to award such prizes in the form of either a lump sum payment or in equal installments over a period of 10 or 20 years, through July 31, 2008, the Lottery has awarded twenty-one deferred jackpot prizes totaling approximately $28,868,786. Deferred prize awards were recognized as prize liabilities equivalent to the present value of future prize payments discounted at interest rates for government securities in effect on the date prizes were won. The imputed interest portion of the deferred prize is calculated using the effective interest method at rates ranging from 7.11% to 9.13%. A summary of the present value of the remaining obligations for deferred jackpot prize awards follows (in thousands):
July 31. 2008 Present value of deferred prize award obligations: Discounted obligations outstanding Imputed interest accrued Less current portion of discounted obligations and accrued interest Long-tenn portion ofdeferred prize award obligations June 30, 2008
$ 120 __ 9
129
(129)
$ 120 __ 9
129
(129)
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WEST VIRGINIA LOTTERY NOTES TO FINANCIAL STATEMENTS -Unaudited-
NOTE 12 - DEFERRED JACKPOT OBLIGATIONS AND INVESTMENTS HELD IN TRUST (continued)
Future cash payments on deferred prize obligations for the remaining year are as follows (in thousands):
Original
Discounted Obligations
Imputed
Interest
$
Year Ended
June 30, 2009*
Outstanding
$
120 120
10 10
$
130 130
*Due 8/1512008
The Lottery has purchased long-tenn invesbnents consisting principally of zero coupon government securities to fund deferred jackpot prize award obligations. Such investments are maintained in a separate trust'fund administered by the West Virginia Board Of Treasury Investments on behalf of the Lottery and the jackpot prize winners, with investment maturities approximating deferred prize obligation installment due dates. Investments are canied at fair value determined by quoted market prices for the specific obligation or for similar obligations. Changes in fair value are included as part of investment income. In accordance with Statement No. 3 of the Government Accounting Standards Board, these investments are classified as to level of risk in Category 1, which includes investments that are insured or registered, or for which the securities are held by the State or its agent in the State's name.
NOTE 13 - RETIREMENT BENEFITS
All full-time Lottery employees are eligible to participate in the State of West Virginia Public Employees' Retirement System (PERS), a cost-sharing multiple-employer defined benefit public employee. retirement system. The PERS is one of several plans administered by the West Virginia Consolidated Public Retirement (CPRB) under the direction of its Board of Trustees, which consists of the Governor, State Auditor, State Treasurer, Secretary of the Department of Administration, and nine members appointed by the Govemor. CPRB prepares separately issued financial statements covering all retirement systems it administers, which can be obtained from Consolidated Public Retirement Board, Building 5, Room 1000, State Capitol Complex, Charleston, West Virginia 25305-0720. Employees who retire at or after age sixty with five or more years of contributory service or who retire at or after age fifty-five and have completed twenty-five years of credited service with age and credited service equal to eighty or greater are eligible for retirement benefits as established by State statute. Retirement benefits are payable monthly for life, in the form of a straight-line annuity equal to two percent of the employee's average annual salary from the highest 36 consecutive months within the last 10 years of employment, multiplied by the number of years of the employee's credited service at the time of retirement.
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WEST VIRGINIA LOTTERY NOTES TOFINANCULSTATEMENTS ...U nauditedNOTE 13 - RETIRE:MENT BENEFITS (continued)
Covered employees are required to contribute 4.5% oftheir salary to the PERS. The Lottery is required to contribute 10.5% of covered employees' salaries to the PERS. The required employee and employer contribution percentages have been established and changed from time to time by action of the State Legislature. The required contributions are not actuarially determined; however, actuarial valuations are performed to assist the Legislature in determining appropriate contributions. The Lottery and employee contributions, for the period ending July 31, 2008 are as follows (in thousands):
July 31, 2008
Year-to Date
Lottery contributions Employe,e contributions Total contributions
$52 25 $77
$52
25 $77
NOTE 14 - RISK MANAGEMENT
The Lottery is exposed to various risks of loss related to torts; theft o:f, or damage to, and destruction of assets; errors and omissions; injuries to employees; and natural disasters. The Lottery participates in several risk management programs administered by the State of West Virginia. Each of these risk pools have issued separate audited financial reports on their operations. Those reports include the required supplementary infonnation concerning the reconciliation of claims liabilities by type of contract and tenyear claim development information. Complete financial statements of the individual insurance enterprise funds can be obtained directly from their respective administrative offices.
WEST VIRGINIA WORKERS' COMPENSATION COMMISSION (WCC)
The State of West Virginia operated an exclusive state..managed workers' compensation insurance program (WeC) prior to December 31~ 2005. A framework for the privatization of workers' compensation insurance in West Virginia was established with the passage of Senate Bill 1004 and the wec trust fund was tetminated effective December 31, 2005. A privatized business entity, BrickStreet Administrative Services (BAS), was established and became the administrator of the wec Old Fund, beginning January 1, 2006, and thereafter for seven years, and will have all administrative and adjudicatory authority previously vested in the wee trust fund in administering old law liabilities and otherwise processing and deciding old law claims. BAS will be paid a monthly administrative fee and rated premiwn to provide a prompt and equitable system for compensation for injury sustained in the course of and growing out of employment. The monthly administrative fee for the West Virginia Lottery has been set at a level consistent with prior year payments and the new rate or premium will be established on an experience rated basis. The West Virginia Lottery is required to participate in the new BrickStreet Administrative Services (BAS) experience rated pool, which is expected to be rate adjusted on a quarterly basis.
PUBLIC EMPLOYEES' INSURANCE AGENCY (PEIA)
The Lottery participates in the Public Employees' Insurance Agency which provides an employee benefit insurance program to employees. PEIA was established by the State of West Virginia for State
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WEST VIRGINIA LOTTERY NOTES TO FINANCIAL STATEMENTS -UnauditedNOTE 14 - RISK MANAGEMENT (continued) agencies, institutions of higher educations, Boards of Education and component units of the State. In addition, local governmental entities and certain charitable and public service organizations may request to be covered by PEIA. PEIA provides a base employee benefit insurance program which includes hospital, surgical, major medical, prescription drug and basic life and accidental death. Underwriting and rate setting policies are established by PEIA. The cost of all coverage as detennined by PEIA shall be paid by the participants. Premiums are established by PEIA and are paid monthly, and are dependent upon, among other things" coverage required, number of dependents, state vs. non state employees and active employees vs. retired employees and level of compensation. Coverage under these programs is limited to $1 million lifetime for health. and $10,000 of life insurance coverage. The PEIA risk pool retains all risks for the health and prescription features of its indemnity plan. PEIA has fully transferred the risks of coverage to the Managed Care Organization (MCO) Plan to the plan provider, and has transferred the risks of the life insurance coverage to a third party insurer. PEIA presently charges equivalent premiums for participants in either the indemnity plan or the MCO Plan. Altogether, PEIA insures approximately 205,000 individuals, including participants and dependents. BOARD OF RISK AND INSURANCE MANAGEMENT (BRIM) The Lottery participates in the West Virginia Board of Risk and Insurance Management (BRIM), a common risk pool currently operating as a common risk management and insurance program for all State agencies, component units, and other local governmental agencies who wish to participate. The Lottery pays an annual premium to BRIM: for its general insurance coverage. Fund underwriting and rate setting policies are established by BRlM. The cost of all coverage as detennined by BRIM shall be paid by the participants. The BRIM risk pool retains the risk of the first $1 million per property event and purchases excess insurance on losses above that level. Excess coverage, through an outside insurer under this program is limited to $200 million per event" subject to limits on certain property. BRIM has $1 million per occurrence coverage maximum on all third-party liability claims. NOTE 15 - OTHER POSTE:MPLOYMENT BENEFITS (OPED) The GASB has issued Statement No. 43, "Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans, It and Statement No. 45, "Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions" (OPEB). The State nor the Lottery has previously reported in its financial statements costs associated with future participation of retirees in health benefit plans. The GASB statements are based on the premise that the "costs" of employee services should be reported during the periods when the services are rendered. Beginning with fiscal year ending June 30, 2008, the State will implement accounting and financial reporting requirements as an employer under GASB Statement No. 45. The financial statements will report OPEB funded status and funding progress and any "premium subsidy" resulting from the pooling ofretiree participants with active employees in the health benefit plans. For "employer" OPEB reporting the State will report II expense" on an accrual basis in the amount ofthe ltannuaI required contribution" and a "liability" for the amount of the "annual required contributionlt that was not actually paid.
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WEST VIRGINIA LOTTERY NOTES TO FINANCIAL STATEMENTS ...Unaudited... NOTE 15 - OTHERPOSTEMPLOYMENT BENEFITS (continued) Funds have not been set aside to pay future costs of retirees, but the Legislature in response to the GASB statements, has made statutory changes to create the West Virginia Retiree Health Benefit Trust Fund (RHBn, an irrevocable trust fund, in which employer contributions for future retiree health costs may be accumulated and invested, and which is expected to facilitate the separate financial reporting of OPEB. The legislation requires the RHBT to determine through an actuarial study, as prescribed by GASB No. 43, the ARC(Annual Required Contribution) which shall be sufficient to maintain the RHBT in an actuarially sound manner. The ARC shall be allocated to respective employers including the Lottery who are required by law to remit at least the minimum annual premium component of the ARC. Revenues collected by RHBT shall be used to fund current OPEB healthcare claims and administrative expenses with residue funds held in trust for future OPEB costs. The Annual Required Contribution rate is $461.06 per employee per month. Through June 30, 2008, the Lottery has paid premiums of $98,625 and the State of West Virginia, through its General Revenue Fund on the Lottery's behalf, has paid $472,247 towards the Annual Required Contribution. As of June 30,2008 the Lottery carried a liability of $10,073 on its balance sheet for OPEB. NOTE 16 - NEW ACCOUNTING PRONOUNCEMENTS The Governmental Accounting Standards Board (GASB) issued Statement No. 50, Pension Disclosures, an amendment ofGASB Statements No. 25 and No. 27, in 2007. This Statement more closely aligns the financial reporting requirements for pensions with those for other postemployment benefits (OPEB) and, in doing so, enhances information disclosed in notes to financial statements or presented as required supplementary information (RSI) by pension plans and by employers that provide pension benefits. The reporting changes required by this Statement amend applicable note disclosure and RSI requirements of Statements No. 25, Financial Reporting for Defined Benefit Pension Plans and Note Disclosures for Defined Contribution Plans, and No. 27, Accounting for Pensions by State and Local Governmental Employers, to conform with requirements of Statements No. 43, Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans, and No. 45, Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions. This Statement is effective for periods beginning after June 15, 2007, and management has not yet determined what impact, if any, it will have on the financial statements.
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